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Begin with a detailed score card. The recovery from the 2008-09 recession has been the slowest since any recession in the post-World War II era. It has taken nine calendar quarters since the recession ended in the second quarter of 2009 for real gross domestic product to climb back to its fourth-quarter '07 peak. Assume the same rates of growth during the recoveries from the two previous recessions that rank second and third in severity since World War II -- '81-'82 and '74-'75 -- and the recovery from the recent recession should have taken half as long.
Try other comparisons. In the more than 41 years since 1970, the average quarterly rate of growth, calculated on an annual basis, has been 2.8% -- and that includes all negative quarters in recessions. By contrast, over the recent nine quarters of recovery, the annual rate of growth has averaged just 2.4% -- and as mentioned in last week's column, the Blue Chip consensus forecast calls for more of the same through 2012. Following the recessions of '74-'75 and '81-'82, the first nine quarters of growth averaged, respectively, 5.1% and 6.3%.
Try special excuses. Yes, it's true that the government portion of GDP usually increases year-to-year, and over the past nine quarters there was a small decrease. It's also true that rebounds in housing usually make significant contributions to GDP growth after recessions, and over the past nine quarters residential investment has also been running slightly negative.
So what if we "forgave" this recent period its problems with both government and housing, and recalculated all GDP growth excluding these two components? Even after this heroic attempt to handicap the recent period, it still comes up woefully short. The plunge in real private-sector GDP excluding residential investment was the most severe since World War II, so according to the usual "rubber band" pattern, the rebound should have been proportional.
But over the past nine quarters, growth of real private-sector GDP excluding residential investment has averaged 2.6%, versus 3.8% and 4.7%, respectively, for the nine quarters following the recessions of '74-'75 and '81-'82.
ONE KEY SOURCE OF DISAGREEMENT about the subpar recovery lies in the role played by government policy. Has government been part of the solution, and therefore might it do even more to help solve our economic problems? Or has government mainly been part of the problem itself?
While I suspect the latter, I withhold judgment for the time being, awaiting the 2010 update of the Vancouver, British Columbia-based Fraser Institute's Economic Freedom Index. Originally developed with the help of free-market economist Milton Friedman, the EFI tracks 42 separate measures equally weighted under five different categories, including "Size of Government," "Access to Sound Money" and "Regulation of Credit, Labor, and Business." In light of the bipartisan bickering that is likely to get even more heated as Republican hopefuls square off against President Obama on the economy's ills, it's worth noting that over the long-term, the EFI tells a relatively nonpartisan story.
For example, Economic Freedom moved higher in the administration of Jimmy Carter, a Democrat, and even edged up under Bill Clinton, another Dem, to a 30-year high by 2000. The index then began to fall under the administration of Republican George W. Bush. Since research shows that fluctuations in the EFI, up or down, correlate with economic growth, that may be one reason why growth under Bush was noticeably slower than growth under Clinton.
Also noteworthy: The one-year fall in the EFI from 2008 to '09, the most recent year for which data are available, was the largest on record.
FOR SKEWED USE OF DATA on our economic problems, a good example is a Dec. 7 op-ed in the Washington Post by CNN journalist Fareed Zakaria. According to him, "data simply do not support" the idea that "the economy is burdened by excessive government regulation, interference and taxes."
What data? Well, says Zakaria, try the Kauffman Foundation's Index of Entrepreneurial Activity, which reports a large share of Americans starting their own business. But the Kauffman Foundation's own report -- in the executive summary, no less -- laments "the Great Recession and its high unemployment rates pushing many individuals into business ownership."
Or, says Zakaria, notice that a World Economic Forum survey ranks the U.S. as fifth in economic competitiveness. But the survey report itself notes the "escalating weaknesses that have lowered the U.S. ranking in recent years," including concerns over "government's ability to maintain arms-length relationships with the private sector," "regulation as more burdensome" and "burgeoning levels of public indebtedness" -- some of the very things Zakaria dismisses as not supported by the data.
Such "escalating weaknesses" tend to correlate with slower rates of growth. Data from the World Economic Forum are part of the Economic Freedom Index. More on this in future columns.
E-mail: gepstein@barrons.com
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